Takeaway: Despite what the headline suggests - this effects AMZN shoppers more than the industry. The free shipping threshold for non-Prime users is still $35, but now items purchased from 3rd party fulfillment can qualify to reach that hurdle.

It seems like a logistical nightmare to have to coordinate corresponding orders from different sellers into one system. So kudos to AMZN for having the logistical capabilities to support that.

It's all about basket size. We looked at the math for 4 different retailers to get a sense of the dilutive effect of free shipping (table below). Because of the differences in basket size JWN gets up 1,500bp higher gross margin than KSS on a straight on-line sale.

No way this isn't a margin killer. Now instead of shipping one box full of items for a $35 order - AMZN (or maybe the 3rd party sellers) are left holding the bag for multiple packages shipped from a non-centralized group of sellers.

Takeaway: A port shutdown would have been a catastrophe for a few dozen industries, as well as the balance of US/Asia trade if the West Coast Ports shut down. But that's exactly why they will not shut down. The key bargaining chip -- the Holiday season -- passed without any major hiccups so its not a big surprise to see the two sides sitting at the bargaining table.

Keep in mind that Nike is on the verge of rolling out broader footwear production for FlyKnit product (non-labor intensive) in the US, and closer to the point of sale in other developed markets. We can only think that problems with product delivery at the ports only hastened Nike's plan to diversify its manufacturing base.

CHART OF THE DAY: Deflationary Spiral?

Editor's note: This is a brief excerpt from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones.

The second reason we believe that the Fed will ultimately be more dovish than consensus expects is deflation. As is highlighted in the Chart of the Day, which shows PCE and PCE ex-energy and food going back a decade, inflation is solidly below the Fed’s target of 2%. The charts also shows, of course, that deflation is far from transitory so far with PCE and PCE ex-energy and food tracking very closely.

Bert and Earnings

“The media's the most powerful entity on earth. They have the power to make the innocent guilty and to make the guilty innocent, and that's power. Because they control the minds of the masses.”-Malcolm X

Since starting Hedgeye, we have had two main strategic goals in mind. The first was to reinvent how Wall Street produces, packages and sells research. On this goal, we've succeeded in spades thanks to all of you.

The second goal was perhaps more bold, and has taken more time and planning, but it was to go head-to-head with the traditional financial media outlets and take mind share.

We were early on social media and now have a prolific presence. We hired a cartoonist, which was surprising to some, but has been a great way to communicate ideas and themes. (Case in point is the cartoon below highlighting the less-than-stellar start of earnings season.). Finally, we built out a state-of-the-art TV studio in our office in Stamford.

As it relates to TV, today we are hosting our first full day of interactive programming. We are calling it the Hedgeye Market Marathon and we'll be broadcasting it live from the stock market open to the close: real players, real analysis, and all in real-time. If you'd like to watch or ask Keith, our analysts or guests a question today, you can sign up here:

Back to the Global Macro Grind...

Other than watching Hedgeye TV, most stock market operators will be taking a break from earnings season to watch the Federal Reserve this afternoon. The consensus view of the manic media, and frankly a fair bit of the buy side, continues to be that it is not if, but when as it relates to the Federal Reserve reversing policy and beginning to raise interest rates.

For most 2014, as many of you know, we were of the view that rates were going down and not up. That was a stance that led to some real out performance for those that implemented it into their portfolios. We continue to believe that this is the right stance and that, if anything, the surprise from the Fed over the next few months and quarters is that they will be surprisingly more dovish than consensus expects.

There are two key reasons for that stance from our perspective. The first is that we think growth will slow incrementally in the U.S. On Friday, we will get the preliminary Q4 2014 GDP print, which will, we believe, show a sequential slowdown from the +2.7% year-over-year growth rate in Q3.

The key reasons we believe Q4 will slow from Q3 are as follows:

1) Comps – As you know, we model economies like companies and Q4 has the toughest comparison on a 1, 2 and 3-year basis of any quarter in the last seven years

2) High Frequency Data – The majority of high frequency data we track has slowed sequentially. In particular, PMI has slowed from 59.8 in Q3 2014 to 55.6 in Q4 2014. As my colleague Darius Dale recently highlighted, the three-month moving average in economy-weighted composite PMI has a r² of 0.83 to YoY GDP, so is highlight correlated

3) Yields – The last, and perhaps most obvious, signal of slowing sequential growth is 10-year yields. Frankly, if they aren’t indicating a growth slow down, then what are they indicating?

The second reason we believe that the Fed will ultimately be more dovish than consensus expects is deflation. As is highlighted in the Chart of the Day, which shows PCE and PCE ex-energy and food going back a decade, inflation is solidly below the Fed’s target of 2%. The charts also shows, of course, that deflation is far from transitory so far with PCE and PCE ex-energy and food tracking very closely.

Certainly, we don’t expect the Fed to be ahead of the curve on seeing the challenges of growth and deflation, so there is potential that we have a “hawkish” head fake, but nonetheless we continue to believe the path is to easier policy and not tighter.

Another important point to highlight this morning is the other derivative impact of deflation, which is a negative headwind to corporate earnings in the short run. On a basic level, it is hard to take pricing power when prices are declining. More acutely, as it relates to the SP500 and the near term, it will be difficult to have much aggregate year-over-year earnings growth for the SP500 with oil down more than 50% year-over-year.

This earnings impact is not just on energy related companies (although roughly 35% of SP500 earnings can be tied back to commodities). In fact, in our real-time alerts product yesterday, we actually shorted Keith’s former employer the Carlyle Group ($CG) on the back of the derivative impact from oil. According to Bloomberg estimates, the big three private equity firms' earnings are looking as follows:

Carlyle’s expected to lead the decline with a 73% drop, “driven by its energy holdings”

We hope you can join us for at least part of our market marathon today.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.75-1.85%

SPX 1

Nikkei 17,311-17835

VIX 16.03-23.04 USD 93.65-95.80

Oil (WTI) 44.02-46.81 Gold 1

Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research

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YELP: Thoughts into the Print (4Q14)

KEY POINTS

CONSENSUS 2015 ESTIMATES BEYOND LOFTY: Their mistake is simple: If you don’t understand the attrition element to the story, you can’t understand the excessive number of new accounts required to hit 2015 consensus estimates, which will require both accelerating new account growth and record low attrition.

EXPECTING LIGHT GUIDANCE, BUT: We’re expecting revenue growth of 32% under our bull case scenario (vs. consensus of 43%). However, there are a few risks to being short the guidance release, but not enough to consider covering ahead of the print.

IT’S MORE THAN JUST 2015: The problem with YELP’s business model is that its current account base is always the hurdle. The more accounts it starts the year, the more accounts it will lose, and the more new accounts it must sign to generate growth. We’re are already seeing signs that it’s model is failing, likely because its TAM isn’t large enough to support it.

CONSENSUS 2015 ESTIMATES BEYOND LOFTY

Consensus estimates for 2015 remain outside the realm of reason. Their mistake is simple: If you don’t understand the attrition element to the story, you can’t understand the excessive number of new accounts required to hit 2015 estimates.

In the table below, we created a scenario analysis flexing new account growth and average quarterly attrition for 2015. For perspective, in 2014 YTD, YELP has achieved average new account growth of 40%, which was partially inflated by both the Qype account transition in 4Q13 and the reclassification of SeatMe accounts into Active Local Business Accounts beginning 2014. YELP's average quarterly attrition in 2014 YTD was 18.5%.

That said, YELP will need to produce both accelerating new account growth and historically low attrition rates to hit 2015 consensus estimates, which are calling for 43% revenue growth.

EXPECTING LIGHT GUIDANCE, BUT

For 2015, we’re expecting revenue growth of 32% under our bull case, 23% under our bear case (vs. consensus of 43%). We’re expecting guidance to come in light; especially since management had to essentially cut 2014 revenue guidance last quarter after factoring in the 3Q14 top-line beat. However, there are a couple risks to being short the release.

The first is the two international acquisitions announced less than a week after its 3Q14 release. YELP didn’t provide any financial detail on these acquisitions, so we’re not sure how much upside they might provide.

The second is the precipitous decline in commodity costs, which we have loosely linked to YELP’s attrition rate (although that relationship appears to have broken off this past quarter). This is more of a callout than a legitimate concern.

IT’S MORE THAN JUST 2015

The problem with YELP’s business model is that its current account base is always its hurdle. YELP’s business model is predicated on hiring enough new sales reps to drive the new account growth necessary to compensate for its rampant attrition. Since 1Q12, quarterly churn has averaged 18.8%, with a relatively tight standard deviation of 60bps.

That said, the more accounts YELP starts the year, the more accounts it will lose, and the more brand new accounts it must sign in the following year to generate its growth. This strategy would be sustainable if YELP’s TAM was as large as management believed. It’s not; we delve into its TAM in great detail in the note below.

More importantly, we are already starting to see signs that its model is failing. YELP is now at the point where it can’t produce new account growth in excess of the rate that it is hiring sales reps, which may be the most glaring sign that its model is broken.

Let us know if you have any questions, or would like to discuss in more detail.

Hesham Shaaban, CFA

@HedgeyeInternet

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01/28/15 08:44 AM EST

The Euro, Oil and Sentiment

Client Talking Points

EURO

The Euro bounced fast from $1.11 to $1.13 (on spec that the Fed is more dovish today), but now has to decide whether Greek fires (banks -10-15% this morning, stock market -7%, UST 10YR Yield up almost 100 basis points to 10.46%) are going to be put out by The Draghi again – should he come out with a weekly central planning podcast?

OIL

Same #deflation fire drill – WTI down a full 2% this morning after failing @Hedgeye $46.81 resistance – and has no immediate-term support to $44.02. If the Fed is dovish today (Down Dollar, Up Euro), they could try to bounce Oil again. We would much prefer to be long Gold on that idea right now – Gold has immediate-term upside to $1325.

SENTIMENT

It took 1 up week for U.S. Equity beta to bring the bulls back (there’s only been 1 up week by the way); today’s II Bull/Bear Survey shows the spread between Bulls and Bears widening +16.5% week-over-week to +3680 basis points to the Bull side. Consensus Macro has been wacky long SPY futures/options all year (and short the Long Bond) – we still say do the opposite, until sentiment resets.

*TODAY JANUARY 28TH

WATCH and INTERACT with CEO Keith McCullough and Hedgeye's analysts as they discuss the stock market, economy and more all in real-time. They will answer your questions live via email, phone, Twitter and chat throughout the entire trading day.

Asset Allocation

CASH

54%

US EQUITIES

4%

INTL EQUITIES

3%

COMMODITIES

2%

FIXED INCOME

31%

INTL CURRENCIES

6%

Top Long Ideas

Company

Ticker

Sector

Duration

EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1. Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

It’s a Great Exposure-Picker’s Market: One of the things Keith and I have been hitting on in client meetings this year is how great of a market this is for investors to generate alpha in – both long/short and long-only (via tracking error).

And by “market” we don’t necessarily mean the U.S. equity market (though it applies to our statement); we mean Global Macro markets. Be it at the asset class, region, country, sector or style factor level, the variance of returns among these various exposures is up substantially on a YoY basis.

Specifically, the variance of YTD returns among the nearly 200 ETFs we track in our Tactical Asset Class Rotation Model (TACRM) is up +36% YoY; if you narrow the field to just the top-10 and bottom-10 performers each year, the level of variance is up +65% on a YoY basis.

With return dispersion on the rise across global financial markets, there is no excuse in 2015 for not being able to generate alpha. We are hopeful that you find our daily missives helpful in your quest; as always feel free to reach out whenever you’d like our updated thoughts on any key risks.

Global #Deflation:Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.

#Quad414:After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.

Long #Housing?:The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014. 2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.

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